Tuesday, February 19, 2013

And the Pressure on the Bank of Japan Rises

The Wall Street Journal reports that Japanese Prime Minister Shinzo Abe is serious about a 2 percent inflation target:

"It would be necessary to proceed with revising the BOJ law if the central bank cannot produce results under its own mandate," Mr. Abe said during a debate Monday. He didn't elaborate on the substance of any revision, but indicated he was seeking ways to hold the bank responsible for meeting the inflation target, saying that under the current law, the government can't even introduce a target without the BOJ's consent.

Not exactly a veiled threat. Hit a 2 percent target, or your independence (what little you have left) is history. Abe doesn't comment on current policy, but "hints" at some future policies:

"There are views calling for foreign-bond purchases," as well as for purchases aimed at directly boosting the stock market, he noted, without expressing his own opinion on such proposals. "I hope the BOJ will take effective policy steps that would contribute to overcoming deflation."

The problem with foreign bond purchases - a problem that Abe may simply choose to ignore - is that such purchases would be consistent with outright intervention in the foreign exchange market. It would then become much more difficult to defend the depreciation of the Yen as simply a side-effect of domestic monetary policy. Refer to ECB President Mario Draghi's efforts to limit some of the currency war hysteria:

“Most of the exchange rate movements that we have seen were not explicitly targeted; they were the result of domestic macroeconomic policies meant to boost the economy,” Mr. Draghi told the committee, without mentioning any countries by name. “In this sense, I find really excessive any language referring to currency wars.”

Draghi did add:

But Mr. Draghi also seemed to suggest that central banks could succumb to mutual suspicion about whether exchange rates were being deliberately weakened.

“The less we talk about this, the better it is,” he said.

If the BOJ goes on a foreign bond-buying spree, such suspicion will spread further.

Also interesting is the possibility that Abe will push the next BOJ head to a more active role in supporting equity prices. Japan's economy minister Akira Amari already made clear that boosting stocks is a high priority, even going so far as to put a goal of 13,000 on the Nikkei buy the end of March. The BOJ could help make this a reality.

The question is how they would go about it? My suspicion is that they continue with purchases of equities in fixed quantities, much as it has in the past. From MarketWatch last year:

The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

Jefferies Japan’s head of Japanese strategy Naomi Fink says that while the ETF purchases are really part of the broad push to reflate asset prices in the deflation-plagued country, they do “provide a bit of a backstop, when they think they can curb the downside” for the market.

“Still, it’s a very small amount,” Fink said of the ETF purchases. “It’s more designed to bolster sentiment ... [and] it works best when sentiment is fragile.”

What would be much more interesting is if the BOJ simply set a price target, offering to purchase a Nikkei ETF at 13,000 from whoever wants to sell. If policymakers want 13,000, why not just take the direct route?

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And the Pressure on the Bank of Japan Rises

The Wall Street Journal reports that Japanese Prime Minister Shinzo Abe is serious about a 2 percent inflation target:

"It would be necessary to proceed with revising the BOJ law if the central bank cannot produce results under its own mandate," Mr. Abe said during a debate Monday. He didn't elaborate on the substance of any revision, but indicated he was seeking ways to hold the bank responsible for meeting the inflation target, saying that under the current law, the government can't even introduce a target without the BOJ's consent.

Not exactly a veiled threat. Hit a 2 percent target, or your independence (what little you have left) is history. Abe doesn't comment on current policy, but "hints" at some future policies:

"There are views calling for foreign-bond purchases," as well as for purchases aimed at directly boosting the stock market, he noted, without expressing his own opinion on such proposals. "I hope the BOJ will take effective policy steps that would contribute to overcoming deflation."

The problem with foreign bond purchases - a problem that Abe may simply choose to ignore - is that such purchases would be consistent with outright intervention in the foreign exchange market. It would then become much more difficult to defend the depreciation of the Yen as simply a side-effect of domestic monetary policy. Refer to ECB President Mario Draghi's efforts to limit some of the currency war hysteria:

“Most of the exchange rate movements that we have seen were not explicitly targeted; they were the result of domestic macroeconomic policies meant to boost the economy,” Mr. Draghi told the committee, without mentioning any countries by name. “In this sense, I find really excessive any language referring to currency wars.”

Draghi did add:

But Mr. Draghi also seemed to suggest that central banks could succumb to mutual suspicion about whether exchange rates were being deliberately weakened.

“The less we talk about this, the better it is,” he said.

If the BOJ goes on a foreign bond-buying spree, such suspicion will spread further.

Also interesting is the possibility that Abe will push the next BOJ head to a more active role in supporting equity prices. Japan's economy minister Akira Amari already made clear that boosting stocks is a high priority, even going so far as to put a goal of 13,000 on the Nikkei buy the end of March. The BOJ could help make this a reality.

The question is how they would go about it? My suspicion is that they continue with purchases of equities in fixed quantities, much as it has in the past. From MarketWatch last year:

The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

Jefferies Japan’s head of Japanese strategy Naomi Fink says that while the ETF purchases are really part of the broad push to reflate asset prices in the deflation-plagued country, they do “provide a bit of a backstop, when they think they can curb the downside” for the market.

“Still, it’s a very small amount,” Fink said of the ETF purchases. “It’s more designed to bolster sentiment ... [and] it works best when sentiment is fragile.”

What would be much more interesting is if the BOJ simply set a price target, offering to purchase a Nikkei ETF at 13,000 from whoever wants to sell. If policymakers want 13,000, why not just take the direct route?